It is far too easy for multinational corporations to evade liability for human rights and environmental harms, especially when the companies – which are often based in the European Union (EU) or in the United States (US) – commit those harms in the Global South. We have seen this again and again, from Shell’s extensive pollution in the Niger Delta to the chocolate industries’ reliance on forced labor and hazardous child labor. To address this crisis of impunity, we must pass stronger legislation – legislation that makes companies accountable for their entire supply chains – across the Global North.
In recent years (and especially in the past year), there have been vibrant discussions in both the US and in the EU about prospective laws and regulations that focus on human rights and environmental abuses in supply chains. (These prospective laws are known as bills in the US and Directives and Regulations in the EU.)
In this two-part blog series, we compare two prospective laws: one Directive in the EU and one bill in the US Congress. These two legal methods for corporate accountability take very different approaches. The first, the European Commission’s Directive on Corporate Sustainability Due Diligence, is an EU-wide Directive that would require companies to implement due diligence requirements within parts of their supply chains and to self-report on compliance with these steps. The second, the FABRIC Act, is a federal bill in the US that would establish joint and several liability for brands in the garment industry – but only for US-domestic supply chains. These two models – one in the EU and one in the US, one based on reporting and one based on joint and several liability, one focused on global supply chains and one focused on domestic supply chains in a specific industry – are quite different and yet set out to accomplish similar goals.
In this first blog post, we focus on the European Directive. We first provide an overview of the draft Directive and then explain our main criticisms. While the Directive is a step in the right direction, we are disappointed that it applies only to very large companies and few suppliers, allows third-party audits to count as a form of due diligence, and focuses heavily on process-oriented liability. The second post in this series will then turn to analyze the FABRIC Act.
What Does the Directive Require of Companies?
Under the Directive, companies must integrate human rights and environmental due diligence into their policies; identify actual or potential adverse impacts; prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimize their extent; establish and maintain a complaints procedure; monitor the effectiveness of their due diligence policy and measures; and publicly communicate their compliance with these requirements.
The Directive is still a draft and will not be final for some time (and even after it is finalized, each European state will need to implement the legislation domestically, which will take a couple of years). This slow process is frustrating – but if it passes, it will apply to the largest single market in the world.
Where Does the Directive Fall Short? (And Proposals for Making It Stronger)
The Directive must apply both to large companies and to Small and Medium-Sized Enterprises (“SMEs”).
The current draft Directive applies to only 1 percent of all companies operating in the EU, leaving the overwhelming majority of companies outside of the Directive’s scope. As written, the Directive covers two groups of companies based in the EU: large companies, defined as companies with 500 employees and a worldwide turnover of more than EUR 150 million in the last year; and companies with more than 250 employees and net worldwide turnover of more than EUR 40 million if working in high risk sectors. (The Directive would also cover non-EU based companies that have a turnover of over EUR 150 million or over EUR 40 million if at least half is in a high risk industry.) 99 percent of companies are left uncovered – an immense loophole that will drastically undercut the Directive’s effectiveness.
While there are certainly some small companies that make specific efforts to source ethically, many small and medium companies have hundreds of employees, earn millions of Euros in profit, and cause the same harms as larger companies in supply chains. Like larger companies, small and medium companies often operate under short-term pressure, jumping from supplier to supplier, and underpaying suppliers for goods. To meaningfully shift how companies do business, the Directive must cover both large companies and small and medium companies.
The Directive should cover a company’s entire value chain, not just the company’s “established business relationships.”
Under the Directive, companies are only required to perform due diligence on “established business relationships,” defined as business relationships “whether direct or indirect, which is, or which is expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain.”
This limit on the scope of responsibility creates a massive loophole for companies. While corporations may have some “established business relationships,” they also likely source from many suppliers with whom they do not have long-term and sustained relationships. The Directive should apply to all parts of a company’s value chain, especially to parts for which the risk of human rights and environmental abuses is highest – often in the least regulated parts of a value chain connected to short-term suppliers.
For example, in the West African cocoa industry, companies often have their “direct” supply chains and their “indirect” supply chains, which can change from season to season. While child labor, and in some cases forced child labor, are certainly found in companies’ direct supply chains, forced child labor and farms within protected forests are often more likely to be found in indirect supply chains. This holds true across industries; many of the worst human rights and environmental abuses occur in parts of the supply chain that are untraceable and opaque, and where companies do not have established business relationships.
The Directive’s reliance on “established business relationships” also ignores the fact that it may be more profitable for companies not to have as many “established business relationships,” either as a means to search and compete for the lowest price or to avoid being covered by the Directive. This narrow scope incentivizes companies to jump from supplier to supplier and not to invest in supplier relationships. In other words, with this loophole, the Directive could end up accomplishing the opposite of its supposed objective.
The Directive should not rely on industry initiatives and third-party auditors as a form of due diligence and a “safe harbor” for companies.
The Directive’s reliance on “industry initiatives or independent third-party verification” to verify companies’ compliance is especially problematic. Time and time again, across industries and geographies, voluntary initiatives – including third-party auditors – have been shown to fail workers. Yet the Directive’s reliance on third-party verification allows companies to depend on many of the same third-party auditors who regularly audit factories and farms – and who often fail to identify labor violations taking place.
Studies have shown that social auditors fail to identify evidence of labor and human rights abuses regularly. ELEVATE, a social auditing company that has conducted thousands of audits in numerous countries, “acknowledge[d] that social audits are not designed to capture sensitive labor and human rights violations such as forced labor and harassment.” Significant obstacles should be considered: worker fear and intimidation, threat of retaliation against workers, undocumented sub-contracting, and the pervasive falsification of records. Transparentem, a non-profit organization that investigates environmental and human rights abuses in global supply chains, had similar findings in the apparel industry, where audit deception was commonplace. Similarly, CAL has found hazardous child labor on Rainforest Alliance and Fairtrade certified cocoa farms in Cote d’Ivoire, while other studies have found similar findings on cocoa farms in Ghana, in factories in Myanmar, and on tea plantations in India.
Moreover, there are some regions of the world where third-party auditors are unable to function at all. For instance, within the Xinjiang Uyghur Autonomous Region (“XUAR”) in China, there is no valid way for an auditor to ensure that a workplace is free of forced labor. Worker interviews, which are essential to the methodology of any labor or human rights investigation, cannot generate reliable information under current circumstances. No worker can speak candidly to factory auditors about forced labor or other human rights issues without placing themselves and their families at risk of brutal retaliation; there are widespread restrictions and repression of fundamental freedoms; surveillance is ubiquitous; and civic space is non-existent. The Directive’s reliance on industry initiatives and third-party verification would essentially provide companies with a “safe harbor” for box-ticking exercises that do little to verify actual working conditions.
The Directive should allow workers and victims of corporate abuse to bring claims against companies within a rights-based framework.
The ability for victims of corporate abuse to bring claims against corporations and receive remedy for harms they have suffered should be a central tenet of the Directive. Moreover, liability must be outcome-based rather than process-oriented. Civil liability cannot be based on whether or not a company carried out a box-ticking exercise, as that will result in victims being unable to access remedy. Even if a code of conduct is incorporated into a contract and companies require social audits, such steps cannot be the basis for a company to avoid liability. The current system already relies on codes of conduct and social audits, yet abuses within supply chains are all too common. Workers who are harmed must be able to bring civil claims against companies based on the harm, rather than whether a company ticked some boxes.
Moreover, the use of codes of conduct should provide for liability. Supply chain workers, as implied third-party beneficiaries of company/supplier contracts that incorporate codes of conduct clearly intended to safeguard workers from labor and human rights abuse, should be able to bring claims against covered companies for enforcement of such codes. If the mere existence of contractually-incorporated codes of conduct shield companies from liability, then these standards become yet another box-ticking exercise. Codes of conduct should protect workers, and when codes are violated workers should have the right to enforce compliance and seek remedy as rights-holders under the company/supplier contract.
To truly be an effective tool for victims of corporate abuses, the Directive should also provide more clarity on three key procedural aspects:
First, the Directive should allow for trade unions and civil society organizations to have standing to bring claims as representatives of workers and communities.
Second, and in a similar vein, it is vital that the Directive establish class action lawsuits (representative actions). Class actions allow victims to bring similar claims as a group, cutting down on costs for victims who often will not be able individually to find or hire attorneys to bring these claims. In many of these cases, the costs of litigating a single plaintiff’s claim against a multinational corporation may be prohibitively expensive; by allowing for class actions, the cost for each plaintiff is lowered, making remedy more accessible.
Third, the Directive should include a reasonable statute of limitations – such as ten years – for claims to be brought. (This would mirror the statute of limitations in the US Trafficking Victims Protection Reauthorization Act.) The statute of limitations should not be dependent on foreign law (generally where the harm occurred), as this often makes it all but impossible for a victim to bring such claims. For instance, applying the statute of limitations from foreign law for a tort claim will often mean there is a very short statute of limitations, such as two years. This makes it very challenging for victims to bring suit, as two years is often much too short a time for potential plaintiffs to find attorneys, collect evidence, clarify their victim status, and successfully have a claim filed.
The Directive should include concrete guidance on grievance mechanisms that prioritizes remedy.
Grievance mechanisms can be effective tools for remediation for workers, but only if they are rights-based and remedy-oriented. However, grievance mechanisms should be seen as supplementary to, not a substitute for, civil liability.
Unfortunately, the Directive’s guidelines on grievance mechanisms are vague, do not include best practices for grievance mechanisms, and could lead companies to establish weak and ineffective processes that are merely box-ticking exercises. The Directive should ensure that companies’ grievance mechanisms are not merely hollow requirements on paper, but are accessible for workers and victims of corporate abuses and provide real remedy. For this to be a reality, the Directive must provide basic guidelines for grievance mechanisms that makes it worker-focused and rights- and remedy-based.
Most problematically, the Directive does not require that grievance mechanisms provide outcomes for victims of corporate abuse. Instead, it merely provides that victims are allowed to “request appropriate follow-up” and to “meet with the company’s representatives.” This fails to ensure that victims actually receive remedy through grievance mechanisms, making them ineffective and overly reliant on the voluntary actions of companies that violate the Directive.
Conclusion
While CAL welcomes this draft Directive as a step towards accountability for corporate abuse, we believe the final version will be significantly more effective if it focuses on outcome rather than on process. We hope that this Directive does not become a box-ticking exercise for companies, but instead is rights-respecting and provides real remedy to victims of corporate abuse.
Allie Brudney is a Staff Attorney at Corporate Accountability Lab.
